Government accepts changes to small firms loan scheme

The Government has accepted the recommendations on the future of the Small Firms Loan Guarantee (SFLG) in the Teresa Graham report.

Key recommendations include expanding lending limits to £250,000 per business, reducing bureaucracy surrounding the scheme, and raising the turnover limit to £5.6 million for all eligible businesses.

Abuse

However, the proposals have not met with universal approval as some accountants warned that the proposed changes could spark abuse by the banks and huge losses for the taxpayer.

The review has recommended that total control over the loans be handed to the banks. Previously bank managers had to get approval from Whitehall.

According to a report in the Times, Ministers will argue that the move will encourage more banks to become involved in the initiative, but accountants and business recovery groups fear the lack of Whitehall scrutiny could tempt rogue branch managers to launder doubtful loans through the scheme.

Lifeblood of economy

Welcoming the report on behalf of Government, the Chancellor of the Exchequer Gordon Brown said: "Small businesses are the lifeblood of our economy - boosting productivity, creating employment and prosperity, and revitalising our communities.

"Access to finance is a vital ingredient in the growth of any successful business. Our ambition as a Government is to take action to ensure that talented entrepreneurs can get the finance they need to convert their ideas and creativity into thriving businesses."

Enterprise Capital Fund

The Secretary of State for Trade and Industry, Patricia Hewitt, said she had asked the Small Business Service to work with the British Bankers' Association, the high street banks and other SFLG lenders to determine how best to successfully implement the recommendations. A further statement is expected at the time of the Pre Budget Report in the Autumn.

Ms Hewitt said: "However, I can confirm that, in the event of a full Enterprise Capital Fund programme being launched, the Government will create a new public company to deliver our financial products for small firms - putting our support for enterprise on a commercial and market orientated footing."

Key recommendations

The Government has committed to the implementation of the review's key recommendations, including:

• Expanding the lending limits to £250,000 per business for all eligible businesses
  
• Raising the turnover limit to £5.6m for all eligible businesses
  
• Reducing bureaucracy by making changes to the operation of SFLG
  
• Better targeting of SFLG at start ups and young businesses by introducing a maximum age limit for eligibility of three years' trading activity, and reserving a segment of SFLG funding for lenders with a clear focus on high-growth businesses
  
• Incentivising an increase in SFLG penetration, particularly wider geographic availability throughout banks' network of branches
  
• Encouraging new lenders to join the scheme
  
• Allowing successful serial entrepreneurs to benefit by removing the current £250,000 limit on lending to any individual
  
• Introducing an overall lending limit for the scheme to limit contingent liabilities, by allocating each lender a capped 'pot' of lending each year according to historical usage of SFLG
  
• The new public company, which will oversee the Enterprise Capital Funds, should, if created, be responsible for the delivery of SFLG. In the interim, the Government will establish a forerunner body to advise it on implementing the changes to SFLG, and the establishment of ECFs.

Background

The SFLG was introduced in 1981 to help individuals overcome the problems of obtaining the finance to start up new small businesses and also help small businesses expand.

It guarantees loans from banks and other financial institutions for small firms that have viable business proposals but which have tried and failed to get a conventional loan because of lack of security.

In December 2003, Teresa Graham was asked to work closely with the main SFLG lenders to examine, and if appropriate make recommendations regarding:

• the structure and rules of the SFLG and their appropriateness to the scheme's effective operation; and
  
• whether the SFLG is proving effective in tackling the financial barriers faced by start-ups and small businesses in the current market.

Teresa Graham has almost 30 years' experience advising small firms seeking finance, principally through her career at Baker Tilly, where she headed up their Business Services Department. She also has a background of working with Government and is currently Deputy Chair of the Government's Better Regulation Task Force, a non-executive member of the Steering Board of the DTI's Small Business Service and member of the DTI's Small Business Council.